Facing a challenging balancing act in 2012

BY Martin Westcott
Managing Director P E Corporate Services SA (Pty) Limited & Chairman of the Work Dynamics Board

South African companies’ remuneration committees, guided by the need to comply with new governance requirements, face a particularly challenging year as they approach the task of interpreting and determining fair and appropriate levels of pay for executives as defined in the King III code.

This needs to be done in an environment in which governance standards are under increasing pressure both in South Africa and globally. In South Africa, the King III recommendations stress the responsibility that remuneration committees have in ensuring that executive packages are appropriately balanced in terms of fixed and variable pay, as well as being equitable (or reasonable) on both fronts. Shareholder approval is also now required, placing a new onus on remuneration committees and boards of directors to ensure that policies are both well thought through and aligned with market best practice. Recent statements by U.K. Prime Minister, David Cameron and Mervyn King, Governor of the Bank of England, indicate similar concerns in the U.K. A recent statement by David Cameron suggests that shareholders be given a binding vote in the U.K. in approving executive packages.

In South Africa, the issue is complicated by substantial socio-political concern about gaping pay differentials and the resultant income inequalities found across society. Both government and union representatives have been vocal in recent months in calling for businesses to consider greater modesty in executive salaries and make some effort to address high pay differentials. Prominent statements by the Minister of Finance in November endorsed earlier statements by the Minister of Public Enterprises suggesting that a national forum needs to be convened to discuss high levels of executive pay. The Public Investment Corporation is, in addition, working on an accountability framework (which includes considering executive remuneration levels) to guide its policy in respect of organisations in which it invests.

Pay differentials are a relative measure – but a very emotive one. While differentials have reduced slightly and levelled out over the past two to three years (largely as a result of lower incentive earnings and more moderate increases being awarded) they still remain extremely high by global standards.

It is also worth noting that the pressure on wage differentials is not exclusively a private sector issue any more. Parastatals and State Owned Enterprises now pay very close to private sector rates at executive level in respect of guaranteed pay and short term incentive packages.

Severe skills shortages of executives, and professionally and technically skilled staff, are likely to make Economic Development Minister Ebrahim Patel’s New Growth Path proposals totally impractical in South Africa. These proposals, published early last year, called for a cap on executive pay above R700 000 per annum, plus a limit on salary increases equivalent to current inflation rates for all staff above basic and semi-skilled levels. P E Corporate Services (Pty) Limited’s most recent salary survey data confirms that a major proportion of senior executives in both the private and public sectors already earn in excess of this amount. In addition, a high percentage of companies in South Africa offer pay rate premiums to attract scarce skills. Based on current market data, over 50% of companies have followed this practice for the past seven years.

“the poaching of scarce skills.has exceeded. and still remains unacceptably high.”

Social pressure has also been evident in the fact that increases awarded to employees at bargaining unit level in companies have matched or exceeded increases at executive level for the past two-three years. Current expectations are that increases at all levels will range between 7% and 8% during the next 12 months – higher inflation rates notwithstanding.In addition, many companies continue to experience poaching of scarce skills. This proportion has also exceeded 50% for the past seven years and still remains unacceptably high at 58%. Adding fuel to the fire is the fact that South African executives continue to be extremely well off from a purchasing power point of view in comparison to their international counterparts, notwithstanding a relative decline in disposable income at this level in South Africa over the past 12 months. Purchasing power in this context is defined as net disposable income available to an executive after paying tax and social security plus essential living costs. South Africa’s strong position over the past three years has been the result of a relatively strong currency plus good rates of economic growth in relation to the rates achieved by the majority of the country’s established trading partners.

Increases within the public sector continue to match, and in many cases, exceed private sector rates. This, coupled with job creation, has underpinned the massive increases in the State payroll in recent years. Even at executive level, executives in parastatals and State Owned Enterprises are now earning competitively in relation to private sector rates. The only significant difference is that long term incentive pay opportunities do not exist to anything like the same extent within this sector. However, a number of parastatals are developing deferred pay-out arrangements linked to their short term incentive schemes, both to compensate for the lack of long term incentive earnings and to provide a form of retention policy in this sector.